Ultimate Beginners Introduction to Forex part 3

2009 April 16

by kh

What the hell is a pip?

Well, when you look at forex charts, you see that each currency pair has two sets of numbers, a pip is the last digit of each number, so if a price changes from 0.870 to 0.873 it has moved 3 pips. The pip spread is the gap between each number, for example 0.910/0.915 has a 5 pip spread. This is important stuff, because what you want is lower pips, the lower pip, the easier it is for you to profit.

Why is that?

Well, when you start a trade, you always open at the ‘worse’ position and therefore you must cover the pip spread before you start making profit. If the pip spread is too large its hard to profit even if you get the direction of the trade right, so always look for a broker with good spreads.

Ok, so maybe i can make a little profit, but i dont have enough money to make any serious cash

This situation may seem familiar, its that old adage(or is it myth?) that it takes money to make money. In forex there is a little twist to this, you can use someone elses money but keep all the profits. Nothing illegal or bad, its called margins, and essentially what works is you use your money to cover the margin of a trade. As an example, if you had $100 and traded with a margin of 50:1, you would be able to open trades worth $5000. if you did this and the pair you were trading improved by 1%, you would be $50 up(before commision), but then your next trade you can open $7500, another 1% and thats $75 for you. If you are good at picking what will happen between a currency pair, you can quickly build your capital trading like this, however there is a catch, this is the real world and money can be lost. When trading margins your risks go up with your rewards so always be careful that your not risking to much, becasue just as you can make fast profits with margin trading, you can also lose it carefully. See our Risk Declaration for more details;

So, we finished the ultimate guide part 2 with something called margins, lets find out how they work in the final part of the guide, part 4.